There’s been a huge to-do about the Toronto’s Island Airport and it’s primary tenant, Porter Air’s, desire to expand its operations including newer (and larger planes) coupled with newer (and further routes). To expand Porter needs a larger runway at Billy Bishop Airport and plans to use fancy Bombardier “whisper” jets instead of its current crop of turbo-props. Jets are banned from the airport as part of the “tri-partite” agreement between the Toronto Port Authority, Toronto Municipal Government and The Government of Canada. mr porter

As with anything to do in Toronto, everyone has opinions about Porter’s plans and most opinions center around traffic. Traffic is after all, the crux of our municipal psyche.  The con side is concerned with the potential increase of air AND vehicular traffic around the island airport which is expected to grow from 2M to 4M passengers. While those arguing in favour note that the Island Airport is necessary since it has become damn near impossible to get to Pearson.

I can see the pro side to the argument: gee whittakers Jono, the Island Airport sure is convenient, as well as the con side, gosh Jono why doesn’t Toronto have a nice waterfront like Chicago?, what is missed in this debate, however, is what I think, is the real rationale for Porter’s planned expansion.

Porter Airlines was founded by Robert Deluce in 2006 as a regional airline that was going to bring style back to flying. Airline stewards wore specially made pill-box hats designed by Joe “fresh” Mimran. The airline served you a free (!) Steamwhistle Beer in a real glass.  There was an espresso bar, also gratis, in the waiting lounge. For weary travellers who had become used to post 9-11 terribleness, rude Air Canada staff, the clusterfuck of construction at Pearson, and the overall reduction in airline pleasantries (take your goddam free pretzles and wave your hands in the air as we x-ray you), Porter was kinda awesome.

Deluce’s strategy to create a boutique airline that served a small number of regional airports direct from downtown Toronto made a lot of sense and coupled with its retro branding, Porter took off, literally and figuratively.  Porter’s initial success should come as no big surprise considering that Deluce himself comes from an aviation family (he sold Air Ontario to Air Canada) and helped launch Canada 3000, selling his stake before Canada 3000 became a victim of over-ambitious expansion.  After several lawsuits with the City (over the infamous Bridge), and several somewhat nefarious dealings (including using money from a lawsuit to purchase the YTZ terminal and kick out Air Canada) Porter, and by extension Deluce, has flourished over the long-term at Bill Bishop Airport.

As with any entrepreneurial endeavour Deluce required start-up capital to fund his airline. Fancy airplanes and cute branding doesn’t come cheap.  Porter’s original investors included Edgestone Capital Partners and Borealis Investments (OMERS), who invested approximately $125M into the airline.  It’s unknown how much each partner invested nor what the ownership stake/structure is, but presumably these investors, which include a significant institutional investor, are looking for significant ROI.  This means that they need significant profit, an ability to sell their shares in the airline (an acquisition), or the ability to liquidate their equity via a public offering. It also means that as private investors, Borealis and Edgestone, can’t just sell their equity in a company unless there is a willing buyer.

This brings us to Deluce’s long-term plan to take Porter public. In 2010 Deluce made noise about filing for an IPO and after registering with securities commissions found that there wasn’t really an appetite on Bay Street for a Raccoon who likes to “fly refined”. Porter lowered its initial share price from $7 to $5.50 and still found too few takers. While Deluce has always blamed the Great Recession, it may be because airline stocks are notoriously poor investments. As Warren Buffet infamously said: “ If a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright.  Seriously, the airline business has eaten up capital over the past century like almost no other business. You’ve got huge fixed costs, you’ve got strong labour unions and you’ve got commodity pricing. That is not a great recipe for success. In short, investing in airlines is nuts.”

As a private company there’s no way for anyone to know for sure how successful or not Porter is.  What is known about Porter’s revenues and profitability mostly comes from the 2010 prospectus that it filed as part of its aborted IPO. From that prospectus we know that in 2009 Porter lost $4.9 million on revenues of $151.2 million. The company also had an accumulated debt load of $306M.

What is oft repeated about Porter when it comes to profitablity is that the airline needs only a small percentage of its planes full to be profitable (around 49%). Which is why, according to Deluce, Porter became profitable in 2011 as well as 2012.  This is why when you see a half empty porter plane and think they’re losing money shleping your ass to Montreal – they aren’t. Porter’s competitors, who use less fuel-efficient planes and have to deal with unions, need somewhere in the range of 75% load capacity to be profitable.

Profitable or not – there’s no liquidity in Porter. This means that Deluce needs to create an opportunity for private investors to liquidate their shares while also raising money to fund expansion. To create this opportunity Deluce needs to create some sizzle.  He needs a growth story.  New routes! New planes! Expansion.  In short Deluce needs Porter Plans to make his airline attractive to capital markets.

Investment bankers need something to sell to investors who buy shares when companies go public.  If you look at Twitter or Groupon’s prospectus what gave bankers a hard one wasn’t their profitability, but their “growth stories” i.e. their year over year revenue growth.  Heck, Twitter, wasn’t profitable upon IPO, but what caused investors to salivate over its shares was the fact that it had 100% revenue growth!

I haven’t seen Deluce’s numbers – but I’m going to make an assumption that he’s maxed out on growth.  The last three destinations Porter has added have been: Timmins, Washington and Sault Ste Marie. With the Shania Twain experience having closed down – I’m not sure there’s a huge demand for flights to Timmins. And for the record Timmins was the last new destination Porter added and that was in 2012. I’m going to assume that (even if) its Timmins route is profitable, it a) hasn’t been a huge been a huge revenue boost (there are only 4 flights a day Mon-Fri) and b) there’s no long-term growth on that route.

In fact I did a little math (see chart below) and assuming Porter flies at 49% capacity and the average price paid per ticket is the current lowest fair ticket, Porter gross $13M a year on its Timmins route (that figure doesn’t take into account Porter’s infamous seat sales nor does it take account seasonality).  Based on that…iIf I’m an investor and I’m looking for huge growth numbers, Timmins isn’t cutting it.  $13M is fun… but not when you’re sitting on $300M+ of debt. And it’s not like Porter can buy more planes and another 5 flights a day to Sault Ste Marie – there just isn’t a demand even with a free Steamwhistle.

PorterIt doesn’t matter whether or not Porter is profitable (I suspect its break-even and does some funny accounting vis-à-vis the fact that its fixed base operations has a monopoly at YTZ’s FBO) but what matters is whether Porter is growing and growing at a big enough clip to make an investor want to invest in it.

It probably isn’t.

Without major growth numbers, there’s not going to be an IPO, which means Robert Deluce, who’s now in his sixties, can’t pay his investors (including himself) back; with the exception of whatever narrow profit the airline is currently making it means there’s no real ROI on my investment. And quite frankly if I’m Edgestone or OMERS, its high time to get my money out because while its been a fun 7 years, I also could have invested 6 or 7 years ago in Facebook and gotten crazy ROI.

What I’m trying to say here is that Porter’s plans aren’t really about creating long-term value for the city, nor are they about creating long-term value for potential shareholders who buy shares from a public Porter. Operating a North-American wide airline is completely different stakes from running a niche one.  The tarmac is littered with carcass’s of wide bodied airlines that flew too close to the sun.  Porter’s plans are about building a story that can be sold to investment bankers who can then sell Porter on the public markets allowing for Porter’s existing investors to liquidate their ownership.

So the question is not really – do we want jets, even quiet ones, at the Island Airport – the question is do we want to let one man (Robert Deluce) play a city of 2.5M people so that he can feather his and his investors’ nests?

PORTER AIRLINES INC. - Porter Cityscape